First Niagara Is a Long-Term Bargain After M&A Mess

The failed merger strategy of First Niagara's former CEO may have set up an opportunity for investors.

NEW YORK ( TheStreet) -- First Niagara Financial Group ( FNFG) may be a strong turnaround investment after the architect of the bank's aggressive merger and acquisition strategy, John Koelmel, abruptly resigned on March 19.

The Buffalo, New York-based lender may be undervalued after Koelmel was unable to deliver on a effort to opportunistically grow First Niagara in the wake of the financial crisis, according to investors and industry analysts.

Koelmel orchestrated a series of acquisitions culminating in a $1 billion deal for HSBC's ( HBC) bank branch network in upstate New York and New England.

Although the acquisition indicated First Niagara was a rare U.S.-based lender using the deconsolidation of struggling European banks to grow its business, the move was quite a tough pill to swallow. To fund the acquisition, First Niagara cut its dividend 50% to 8 cents a quarter, and the bank also undertook dillutive stock offerings.

Roughly a year into the acquisition, First Niagara has been unable to prove its value to investors, who've suffered a drop in the company's earnings per share to go along with the lower dividend and uncertainty about the company's strategy.

First Niagara's operating earnings per share declined to 75 cents in 2012 from 98 cents in 2011.

In addition to Koelmel, top executive Oliver Sommer left First Niagara, after coming over from consulting firm Aston Associate to help the bank execute on its aggressive M&A plans.

For investors, the HSBC branch deal and Koelmel's recent exit underscore a painful couple of years mired by the stock's underperformance. First Niagara shares are down 11% over the past 12 months, in contrast to a gain of over 15% for the Financial Select Sector SPDR ( XLF) exchange traded fund.

Larger and better capitalized banks that have grown market share by way of acquisitions, including Capital One ( COF), PNC Financial ( PNC), Bank of Montreal ( BMO) and Wells Fargo ( WFC), have shown much stronger execution and a more coherent story for investors.

But Koelmel's seeming opportunism may eventually pay off.

"Koelmel was shaping up to be a 21st-century version of the legendary Hugh McColl," Tom Brown, who runs Second Curve Capital, wrote on Wednesday, referring to the former NationsBank head who orchestrated its late 1990s takeover of Bank of America ( BAC).

Brown went on to say that although Bank of America's expensive buying spree did nothing for its shareholders, it did help cause a rise in bank stock valuations. "Part of me is disappointed," Brown wrote. "On the other hand, First Niagara's board did absolutely the right thing in shutting down Koelmel's growth-via-acquisition-no-matter-the-price strategy."

Looking ahead, Brown thinks the bank is in a strong position in Northeast markets, which can return it to a position of earnings growth and stability.

"The right CEO there has an opportunity to add real value," wrote Brown, who suggested former Bank of America CFO Al de Molina, as a possible candidate, along with Cathy Nash, who prepped Citizens Republic ( CRBC) for its pending sale to First Merit ( FMER). Brown also listed former Fleet/Boston head of retail operations Brad Warner, as a possible successor to Koelmel.